Bed Bath & Beyond Inc. (BBBY) CEO Mark Tritton on Q3 2021 Results - Earnings Call Transcript

Shake Shack Inc. (NYSE:SHAK) Q1 2022 Earnings Conference Call May 5, 2022 5:00 PM ET

Company Participants

Annalee Leggett – Senior Manager, Investor Relations & FP&A

Randy Garutti – Chief Executive Officer

Katie Fogertey – Chief Financial Officer

Conference Call Participants

Michael Tamas – Oppenheimer

Nicole Miller – Piper Sandler

Jake Bartlett – Truist Securities

Brian Mullan – Deutsche Bank

Lauren Silverman – Credit Suisse

Drew North – Robert W. Baird

Andrew Charles – Cowen

Jared Hludzinski – JPMorgan

Operator

Greetings, and welcome to the Shake Shack First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Annalee Leggett, Senior Manager of Investor Relations and FP&A. Thank you. You may begin.

Annalee Leggett

Thank you, and good evening, everyone. Joining me for Shake Shack’s conference call is our CEO, Randy Garutti; and CFO, Katie Fogertey.

During today’s call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release in the final details section of our supplemental materials.

Some of today’s statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 18th, 2022. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change.

By now, you should have access to our first quarter 2022 shareholder letter, which can be found at investor.shakeshack.com in the quarterly results section or as an exhibit to our 8-K for the quarter. This shareholder letter is a new more in-depth format replacing our prior supplemental presentation.

I will now turn the call over to Randy.

Randy Garutti

Thanks Annalee. Good evening, everyone. You’ll notice our remarks tonight are going to be a bit shorter than prior calls as the team has provided a new shareholder letter format, which dives a much deeper in the numbers, visuals, and strategic plan. We hope you’ll spend some time with its excellent new report.

So, before I get into the results of the first quarter, I want to highlight our team members now more than 10,000 people strong in the United States and many more are working through our licensing partnerships abroad.

We recently hosted our Board of Directors meeting at our newest Drive-thru Shack in Orlando. And it gave us a chance to tour the market and reconnect with our leaders and team members across the six Shacks in the region who are driving our recovery every day.

I’m continually amazed at how many of those leaders have been with us for so many years and how many have graduated up through the Shack development experience to become General Managers, Area Directors and more. Shake Shack has led every day by an extraordinary culture, and it’s these people who continue to lead our recovery in the thriving business we’re building ahead.

After being significantly impacted by COVID waves in January and February, Shake Shack’s performance rebounded in March. We experienced meaningful improvement in sales and traffic trends that have continued through April. This highlights the momentum Shake Shack creates as offices, travel, events, tourism and consumer mobility trends improve.

Total revenue grew 31% year-over-year as we generated over $203 million in total revenue and over $309 million in system-wide sales, with average weekly sales improving through the quarter and in April as traffic has rebounded in both urban and suburban markets to more seasonal patterns.

Our same-Shack sales grew 10.3% even after the significant Omicron waves early in the quarter, with our urban same-Shack sales posting 19% growth over last year. We expect these overall trends to improve further into Q2.

Our licensed Shacks in the US and in select global markets performed well, offsetting significant ongoing COVID impacts in Asia. We generated Shack-level op profit of 15.2%, driven by sales levels and ongoing and volatile inflationary headwinds.

Given the persistent inflation we’ve experienced and expect to persist in the near-term, we took a menu price increase in March, in addition to raising our premium on third-party delivery orders. We’re currently running about 6% to 7% increase to menu price over last year, excluding the impact of delivery premiums, and we’ll remain patient as we watch pricing closely through this bumpy period of cost inflation and provide a brief update on the four pillars of our strategic plan.

First, our focus on elevating our people. In just a few weeks, our Shake leaders, home office, suppliers and licensing partners are coming together for our leadership at Tree, focused on development and building our team member bench that is so critical to achieving our accelerated growth goals.

I hosted our first ever retreat in 2009 with just nine attendees. This upcoming retreat will bring together more than 1,200 leaders. I’m thrilled that our culture and the growth we’ve created can now provide this opportunity for learning across the Shack Globe.

This remains a challenging time for hiring, retaining and developing our people, which is why this is where we are focusing investments and where you can count on us to continuously strive to be better employers, providing solid wages, benefits and most importantly, opportunity to make Shake Shack a career choice for the long-term.

Second, we remain committed to our digital transformation, and we’re ramping up investment in every digital channel through the Shack Track digital experience, whether you want your Shack in our app, web, kiosk, drybulk, curbside delivery and now drive-thru. We’re building tools to add even greater convenience to the omnichannel Shack experience.

Even as in-Shack sales rose significantly year-over-year in the first quarter, we continue to drive digital engagement, retention, average check and higher frequency through these channels. All this takes time. And with every click, we’re getting to know our guests better, connecting with them more directly and building touch points that can set the foundation for long-term growth.

Third, we continue to evolve our Shacks, focused on format evolution and development expansion. We opened seven company open Shacks in the first quarter and two more in April. We opened up six licensed Shacks in the first quarter, including a strong market opening in Nanjing, China and two more in April, including another market opening in Guangzhou, China, bringing our total system count to 386 Shacks as a fiscal April end.

Since December, we’ve opened five company-operated drive-thrus, which are an exciting and transformational step in providing even greater convenience than ever before, the experience that our drive-thrus feels great. And we know we have much to learn and evolve with at least five more drive-thrus set to open this year, we’re optimizing for fast learning. We see this as a major piece of our growth strategy ahead.

And while we’re really excited about our pipeline, COVID and supply chain-related delays in permitting, construction, landlord readiness and equipment availability remain intense and in many instances, are impacting our planned opening time lines. Since the beginning of this year, we pushed a number of openings into 2023.

And as we stand today, we expect to open 40 to 45 company-operated Shacks with a back-weighted schedule to the fourth quarter. And our license business, we’re actually running ahead of our initial development plans and expect to open between 23 and 27 licensed Shacks this year.

In our license business, we continue to experience recovery around the globe in our airport and stadium Shacks here in the US, yet our business in China remained significantly impacted today. The COVID lockdowns and intermittent market interruptions across China are impacting near-term licensing revenue, creating uncertainty for this important market for the foreseeable future.

As we look towards growth in our license business, we see this as a massive white space opportunity. Our brand resonates around the world, and we’re taking this time to expand partnerships and open up new markets. This week, we announced that we’ll be expanding to Thailand with a target of 15 Shacks over the next decade. And we also recently announced our expansion to Malaysia, and we’ve got our sights set on more license growth opportunities with strong partners in key international markets.

Finally, we’re relentlessly focused on our guest experience through our Shacks and our products. We just wrapped up our Buffalo Chicken and Fry LTOs. And this week, we’ve launched our newest LTOs, featuring our Bourbon Bacon jam burger and chicken sandwich. We partnered with Makers Mark, to create a delicious summer menu. And don’t miss out on our slate of summer lemonades and shakes. As always, our food raises the bar.

I’ll now pass over to Katie to discuss our financial performance in more detail.

Katie Fogertey

Great. Thank you, Randy, and good evening, everyone. I want to begin by taking a moment to thank our incredible team members for their continued perseverance and dedication these past few years. Navigating through ongoing COVID pressures has not been easy, but I speak for all of us here when I say we are so excited for what’s in store for Shake Shack in the coming years, and I’m looking forward to spending time with many of our amazing team members at our leadership retreat in just a few short weeks.

By now, I hope everyone has had the opportunity to view our new quarterly shareholder letter. This replaces our past supplemental presentation. It is available on our website in our Investor Relations section. As I approach my one-year anniversary here at Shake Shack, I wanted to take the opportunity to provide a greater level of detail into the trends that are driving our results today as well as articulate our ongoing and upcoming strategic initiatives and their impact on our long-term growth potential.

Now on to our financial results. Omicron impacted our early first quarter results, and we are especially proud of our recovery and current trajectory. Our first quarter total revenue grew 31% year-over-year to $203.4 million, while Shack sales grew 30.6% to $196.8 million. Licensing revenue grew 43% to $6.6 million. System-wide sales grew by 36% year-over-year to $309.5 million, and we generated Shack-level operating profit margin of 15.2%.

We raised menu price in March by approximately 3.5% and a premium on third-party delivery to 15% from 10% as we remain focused on building back our profitability in light of labor and COGS inflation as well as delivery costs. We have the ability to raise prices further, if necessary and if the inflationary environment warrants.

Sales declined early in the quarter from fourth quarter levels as consumers avoided travel, gathering and return to office, particularly in our urban markets. Omicron and weather drove more than 160 days of closures, 87 of which were in January. Sales were impacted further during certain shifts as some operators needed to throttle channels and reduce hours to provide a great guest experience during these impacted times. We generated $68,000 in average weekly sales, down from $74,000 in the last quarter, but up over 6% year-over-year.

AWS trends increased throughout the quarter from 63,000 in January, accelerating to $74,000 by March and most recently, $76,000 in April with higher traffic and the benefit of our price increase. First quarter same-Shack sales grew 10.3% year-over-year, supported by traffic growth of 11.6%.

As a reminder, we exclude closures that are two days or more from our same-Shack sales calculation. The increase in one-day closures and reduced operating hours, however, was an incremental headwind to our same Shack sales in both urban and suburban markets. April same Shack sales rose 13%, and we are pleased with the continued traffic growth we are seeing, in particular in our urban Shacks. Urban same-Shack sales grew 19% versus 2021 and were heavily impacted by Omicron sales pressures in January and February. However, recent trends have been positive.

Despite these headwinds early in the quarter, Manhattan same-Shack sales still rose 35% year-over-year. Our New York City teams executed on the largest sales volume since COVID, and we’re seeing similar patterns in other heavy hit urban markets like Las Vegas and Washington, D.C., where same-Shack sales grew by more than 20% in the first quarter.

Suburban same-Shack sales grew 4% year-over-year, lapping a positive 20% comp in the first quarter of 2021, even as we realized strong recovery in our urban Shacks. The operational pressures we faced during Omicron had a larger negative impact on our suburban same-Shack sales compared to urban. While traffic trends were positive year-over-year in our suburban Shacks, a greater portion of our sales are coming through In-Check channels, which skew to more single orders than batch delivery orders. We remain encouraged by our opportunity in suburban markets, as we expand development and evolved formats like drive, curbside and now drive-thru.

Our digital transformation is evident, and we continue to invest in marketing and technology to grow our own digital channels. In the first quarter, 43% of Shack sales came through digital channels, even as our In-Check sales grew significantly year-over-year. Once a guest move into our own digital channels, meaning our own Shake Shack app or orders from our website, we find that they end up coming to Shake Shack more often, and they spend more. Since this time last year, driven by our own digital investments, more than 60% additional guests have made a first-time purchase in our own digital channels, and we’re excited about the positive trends that we are seeing with these new guests.

Licensing sales of $112.8 million rose 45% year-over-year. While COVID restrictions in Mainland China and Hong Kong pressured sales, we realized strong performance across our domestic and other international markets. Total Shack level operating profit was $29.9 million or 15.2% of Shack sales, including a 50 basis point positive impact from a benefit related to gift card breakage. Our Shack level operating profit margin improved throughout the quarter, and we realized strong flow-through on the higher sales in March, especially in our urban markets.

In the first quarter, our food and paper costs were $59.9 million or 30.4% of Shack sales, down 60 basis points quarter-over-quarter as our March price increase helped offset some inflationary pressures. Overall, many of our key costs remain highly elevated, specifically beef, but also chicken, dairy and packaging. We outline more details on Page 12 of our first quarter shareholder letter. The inflationary environment remains uncertain, and we continue to target opportunities for improvement wherever possible.

In the first quarter, we realized low-teens percent year-over-year food and paper inflation, and we expect this to persist into the second quarter, moderating to high single-digit to low double-digit year-over-year inflation for the fiscal 2022. We use a unique beef blend that we do not contract. Our 100% all-natural, non-hormone Angus beef is about 25% to 30% of our food and paper costs. In the first quarter, our beef costs rose approximately 20% year-over-year. At this point, the beef market is uncertain, but we are hopeful that it could moderate as we lap challenging compares in the back half of the year, bringing the 2022 outlook for beef up low to mid-single digits.

Chicken and dairy are also important parts of our basket, both of which are realizing higher than normal inflationary pressures, more so dairy than chicken. We expect this to persist throughout the year. Our paper and packaging costs rose high single-digit percent year-over-year in the first quarter, and we now expect this to increase by mid-teens percentage year-over-year for fiscal 2022.

Labor expense was $60.5 million or 30.7% of total Shack sales, up from 29.6% in the prior quarter. Lower sales volumes in January and February were the primary pressure, partially offset by sales leverage in March.

We increased our starting wages by high single-digit percent year-over-year for the quarter, and we’ll continue to invest in our teams as we work towards optimal staffing levels, and we expect to raise our starting wages by mid to high single-digit percent in fiscal 2022.

Operating expenses were $30.2 million or 15.4% of total Shack sales, up from 14.9% in the fourth quarter of 2021, driven by sales deleverage and higher delivery commissions due to an increase in our delivery mix. Occupancy was 16.3% or 8.3% of total Shack sales, up from 8.1% in the fourth quarter of 2021.

G&A was $31.3 million. Excluding a $6 million legal settlement, G&A was $25.3 million, up 37.5% year-over-year as we increased staffing to support the largest opening class on record as well as executed on key digital technology and marketing projects.

Pre-opening expense was $2.7 million in the quarter as we opened seven new Shacks. Depreciation and amortization expense was 16.9%, up 23% year-over-year. We realized a net loss attributable to Shake Shack, Inc. of $10.2 million in the first quarter or a negative $0.26 in earnings per share — sorry, negative $0.26 in earnings per share.

On an adjusted pro forma basis, we reported a net loss of $8.2 million or negative $0.19 per fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, our pro forma tax rate in the first quarter was 28.7%, resulting in a pro forma adjusted income tax benefit of $3.1 million.

Our balance sheet remains in a strong position as we ended the quarter with $358.9 million in cash and marketable securities. We will continue to leverage our strong cash position in support of investing in new Shack openings in a variety of formats, including drive-thru in addition to supporting our other company-wide initiatives.

Now onto guidance for second quarter of 2022 and full year. Our guidance assumes no new COVID-related disruptions or additional unknown inflationary pressures. For the second quarter, we are guiding total Shack sales of $227 million to $232 million, same Shack sales to grow low to mid-teens percent year-over-year and six new company-operated Shack openings.

Licensing revenue guidance of $6.8 million to $7.5 billion reflects a degree of ongoing uncertainty around COVID pressures, specifically in China, which is a key market. We expect total revenue of $233.8 million to $239.5 million, growing 25% to 28% year-over-year.

Our guidance calls for a sequential improvement in our Shack-level operating profit margin to 16% to 18% and reflects ongoing inflationary pressures and investments to support our in-Shack traffic growth.

We are continuing our investments in G&A this year with an eye towards our long-term growth initiatives. Excluding the $6 million legal settlement in the quarter, we now expect to spend between $110 million and $114 million on a full year basis, including approximately $12 million of our total $13 million in equity-based compensation for the company.

We’re not going to provide quarterly guidance for G&A. However, for your modeling purposes, we expect to recognize an approximate $3 million expense in the second quarter to support the biannual leadership conference, and this is included in our annual G&A guidance.

We continue to expect full year depreciation and amortization expense to be between $70 million and $75 million, pre-opening of $14 million to $17.5 million and adjusted pro forma tax rate, excluding the impact of stock-based compensation of 28% to 30%.

This quarter, we also recognized two items I want to add some more touch around. First, a $1.3 million gift card breakage income catch-up, which is included in our GAAP metrics, including Shack sales and total revenue as well as system-wide sales. This adjustment was a cumulative catch-up done in accordance with GAAP.

Second, a $6 million legal settlement in G&A, both are reflected in our consolidated statement of loss in the first quarter. Our GAAP results include this benefit from gift card breakage income and the expense from the legal settlement. Our calculation of Shack level operating profit includes Shack sales, which includes gift card breakage. We called out the adjustment in our remarks today and in our shareholder letter. Same Shack sales, average weekly sales and digital mix, however, are key metrics and not impacted by gift card breakage. We have made an adjustment to how we categorize regions to better align with how we analyze performance internally. You can read more detail about our regional performance on page 7 of our shareholder letter.

So while we continue to navigate a challenging operating environment, our sales and profits are steadily improving. We are investing ahead of a robust global Shack pipeline and building more formats and offering more convenience than ever before. And we are also investing alongside our current Shacks with so many critical initiatives such as proudly supporting our team members, our digital transformation and delivering on that great guest experience. I’m just extremely proud to be part of this amazing team. So thank you for your time.

And with that, I’ll turn it back to Randy.

Randy Garutti

Thanks, Katie. I want to close today sharing the tremendous work of our team towards our focus on ESG. By now, I hope you’ve all had the opportunity to read our Stand For Something Good report released last Thursday. This third installment of our ESG report provides an update of where we are as a company and where we’re heading for the future with a focus on our overall business impact, diversity, inclusion initiatives, sustainability and so much more. The work that went into creating the report, engaged stakeholders in the entire Shack community. We’ve collected and audited our environmental, social and governance data, aligned with our leadership team to envision and execute programs that live our vision, and we partnered with suppliers to highlight the good work we do together.

Building on our previous reporting, we’ve now included our first Scope 1 and 2 emissions analysis and laid a foundation for the next stage of this journey. ESG is an evolving focus, and we recognize there is much for us to do. Our Stand For Something Good report solidifies our commitment to the initiatives that make us unique. Our Shack family, highest level quality ingredients, digital innovation, exciting new formats and more. We’re really excited to share this with the world. And we hope you’ll take a look, have a read, remind yourself yet again of the positive impact Shake Shack is working to have as we grow our business. As always, hope that you and your families stay safe and healthy.

And with that, operator, you can go ahead and open up the call for questions.

Question-and-Answer Session

Operator

Thank you. And at this time, we’ll be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Michael Tamas with Oppenheimer. Please go ahead.

Michael Tamas

Hi, thanks. First, a new shareholder letter and the level of detail you provide is great. So thanks for putting that together. You gave some great color there on the margins you expect for the second quarter and obviously, the cost pressures that are impacting the business. And I think the obvious next question is how you’re thinking about the rest of 2022 and potentially even beyond that. You’re taking more pricing. And if there’s any specific comments you want to make specific numbers, that would be great, but assuming you won’t do that and assuming the cost environment plays out the way you think. Is it fair for us to think about margins being better in the second half of the year versus the first half of the year and potentially even growing year-over-year? Thanks

Randy Garutti

Yes. Thank you. Look, there’s a few things at play there. We’ve given clear guidance for 2Q, which has shows what we expect to be increased margins. There’s a wide range there, because there’s a lot happening. We’re not going to comment on the back half other than to say, I think there’s a lot of uncertainty. And look, we are all living every day in a continued inflated environment that continues to surprise us and everyone else in every company you see. That happens across our cost of goods Katie and the team have given more detail than ever, and I’ll let Katie talk about that a little bit.

So look, we expect we’re going to continue to be a company who can generate strong margins. I think we’re in a near-term pressure point here where so many of our ingredients are up, and we expect them to continue to be up for this year. So, we don’t know exactly where the beef market is going to go, where our key inputs are going to go. We’ve given the best guidance we possibly can on that, and we’ll see outgo. But we’re encouraged by how the first quarter went and our expectations for where the second quarter we hope will go if we see a continued urban and recovery trends that we’ve been experiencing.

Katie Fogertey

Yes. I don’t have a lot more to add on that, and thank you very much, and thanks to the team also who helps us together this great report here. But I would point you to Page 12. It sounds like you’ve already kind of taken a look there, but we give a great dive on our basic composition as well as our outlook for 2Q and then the rest of the year. And as Randy hit on, this is our best look at this point in time, inflationary environment is quite dynamic here, and we are working through as best as we can to kind of manage the pressures that we’re facing.

Michael Tamas

Yes, makes sense. Appreciate that. On the drive-thrus and drive up units really more specifically in the drive-thrus though, I know you’re not giving specific financial metrics out yet or anything. But when you were doing the planning process, can you just describe to us some of the differences between those units and your legacy suburban units? Is it a higher cost labor model? Is the rent structure different? Just anything to help us think about what that model might look like just even qualitatively. Thanks.

Randy Garutti

Sure. Yes, it’s really early. We’ve got five open. We should open one this quarter. And as I said, we should get about five total more open by the end of this year. So by the end of this year, we’ll have about 10 in really varied environments, right? We just opened in Castle Rock in Colorado. We have seen Shacks open and we’re with our team in Orlando last week, and then some cold weather openings that we did towards the end of the year.

But what are we targeting? We’re targeting, obviously, we believe in a higher potential AUV. We’re not sure if that will happen or not, and we’re not sharing our numbers today, but that’s the goal. In terms of our operating margin, our goal will be to have strong AUVs and strong margins with a strong return. At the moment, and we’ve shared this a number of times, you should expect that those are going to cost more to build than our normal Shacks. That will again depend on market conditions.

We’re living in an inflation environment where everything is up a little bit. The whole class this year should be up 10%, 15% than normal. And some of that will be — some of those drive-throughs that are going to be more expensive. And this is why we built the balance sheet that we built over the last year because this has given us the opportunity to optimize for learning, as I’ve said, really get after this as a format that we believe will draw a lot of opportunity for Shake Shack.

And ultimately, the thing we’re really after is increasing the potential addressable market for Shake Shack. And we believe drive-thrus can give us a new look at the way we can think about sites, think about sales capture and really our ability to capture as much share in a market of the burgers that are available to sell there. And I’ll tell you, I don’t know, if you’ve been to one yet, but when you go, it’s pretty cool. It’s working teams working hard to figure a lot of things out, but it feels really good. We’ll share more as the time goes on.

Michael Tamas

Appreciate it that. Thank you.

Operator

Our next question comes from Nicole Miller with Piper Sandler. Please go ahead.

Nicole Miller

Thank you. Good afternoon. Just two quick ones. The first was around the commentary about a customer coming in to your digital ecosystem. When they do that, my question is who is that customer? Do they look a lot like your average customer or a certain cohort specifically wondering about tender and income? And however you compare and contrast that, what does that leave you to be encouraged about these first digital users in your own ecosystem?

Katie Fogertey

Hi. Yes. So on that point, when we — our digital guest, they vary across the board, but overall, very consistent with what we’ve been seeing with our traditional guest base. What we’re really excited about and where we’re investing is helping that guest really understand our menu. The — we see that they’re spending more than our intakes. What we’ve shared is that it’s a 25% more than 25% premium. And we can see that when they come into our own channels that they come back more often.

And that personalized connection that we’re building with the guest delivering and legging hospitality through all of our channels through digital and in check. It’s really the great audio channel experience that we are building, and it’s awesome to see it resonate with our digital guests. And also, we’re starting to see more and more guests come into the digital channels through various ways, if it’s in check or maybe they’re going to kiosk and then we’re getting them to download the app. It’s a really exciting time.

Nicole Miller

Okay. I was thinking maybe younger or maybe more like value seekers or something like that. But if it’s just kind of everybody is coming, then I guess that’s good, too.

Randy Garutti

It is. It is, Nicole. And I think one of the — it’s not a different guest, I think, is the answer to your question, which are guests generally probably are younger than many others, as you know. We’ve got that kind of sweet spot of Young all the way up into all ages really, but a pretty dynamic younger age guests that we expect to have coming. And it’s very balanced between men and women generally at Shake Shack over time, and that’s been consistent over time. It hasn’t really changed, even as we’ve gone to more suburban and different. But it’s so different per Shack, right?

Our suburban Shacks often have higher average checks. We know our digital guests have a higher average checks. And there’s just so many more new ways we’re getting to know everybody as they come into the Shack more often. But I think this is what has been one of the most encouraging data points of our continued recovery, and we’re not there yet, is in Shack sales are up, up, up, right? Where this first quarter up in our like-for-like Shacks, up over 50% in Shack, but our digital sales is still holding. And our percentage of total sales that is digital still holding even as in Shack continues to grow, and that’s a really encouraging sign for where we believe the business is headed.

Nicole Miller

Thank you. Just a last quick one on unit development. More on a rest of world focus. I think we all understand there’s a lot of moving pieces. And I was starting to think more about the complexities that even if certain situations change, the complexities of just going abroad are likely to be any better for quite some time. So what’s the reality of like the international unit growth percentage tapering, maybe the number of units holds, but the acceleration there is on pause, not to say into perpetuity, but just for some pretty good chunk of time here? And maybe within that context, talk about the unit level economic model, in particular, if you can share anything in regards to China. Thank you.

Randy Garutti

Yes. So let’s start with China. Deeply impacted right now. Most of our restaurants in Shanghai are closed. Those that are open can only do self-delivery right now themselves. In Beijing, where we have four Shacks, that market is mostly closed doing just delivery pickup type of options there. So, we just don’t know what’s going to happen to China in the near term. Long term, we are very bullish on China. And I think the answer to your accelerated or potential unit growth will lie significantly in China. And as we continue to do that, how much can we grow there and how quickly do we want to.

Part of increasing that development is adding new markets. So we’ve added Thailand, we’ve added Malaysia. And frankly, even with the world travel being different, our international opportunities have not ceased to continue at a rapid pace. So for us, it’s really about taking our time, not doing too much too fast. That’s why we’re doing these two new markets next year. But in addition, we often forget because we talk about licensing as the global business.

Our domestic licensing business continues to grow. We’ve got new event spaces, new stadiums that we’ve opened up. We just open in St. Louis for the Blues. This last quarter, we’ve got a new deal with Apple Green, where we’re going to do New York throughway and more in our New Jersey Parkway and Turnpike opportunities, and we love that piece of the business. So too early to say because we need to unlock that model and really figure it out, but we’re really bullish about that. And today, we increased our guidance on what we expected for units in license this year. So we were at 20% to 25%. We feel confident at least 23 and potentially up to 27%. So that is — that’s going to be a nice add for us. But we really like this part and want to keep growing it.

To your unit economic question, it really depends on the market. We have extraordinary AUVs in many of our Asian business. In our Middle East business, it’s much more mature. So it generally tends to have the newer openings, less new openings, lower AUVs, but really dynamic unit economic model as well as you’ll see our partners continue to grow. So, lots in that. We love the international business. We think it’s a super smart part of the asset-light opportunity we have to have roughly 40% of our sales in a license asset-light environment and positive cash flow. So. lots to do, lots ahead.

Nicole Miller

Thank you.

Operator

Our next question comes from Jake Bartlett with Truist Securities. Please go ahead.

Jake Bartlett

Great. Thanks for taking the question. Mine is on the average weekly sales that you saw in March and April. If you could just help us understand the trajectory there? And what is the typical March to April change in average weekly sales? I’m just wondering about seasonality, just so we can see really the underlying improvement that you’re seeing? And then also, how does April compare for the rest of the year? Is that a reasonably low or high kind of seasonal month for Shake Shack?

Katie Fogertey

Yes. So at this point, with the bigger driver here of our trends is just the overall recovery that we’re seeing with what I’ll call it, consumer mobility, but let’s just break it down to what the parts are. It’s returned to office. It’s travel and tourism, people moving about in their normal routines. When we look at dayparts, what we saw in March and into April, we’re seeing particular strength at urban weekday lunch.

Those are all signs that our business is being driven much more by these macro owned currents of people kind of emerging from Omicron and less really from any kind of calendar shifts.

Randy Garutti

And Jake, one of the things to point you to page 7 on the letter as we think about regionally, we’ve talked about this story through COVID. I think some of the most encouraging things we’re seeing is while suburban is kind of holding where it’s been, urban continues to grow, Manhattan specifically up 35% in the first quarter.

That’s a big number. Now — and it’s not back to what it was, still Manhattan, right? And Manhattan as a proxy for our deepest urban restaurants around the country still remain impacted, but our — they’re coming back. And that’s what we feel good about when we think about AWS. But the trend is in the right direction for sure. Good to see that 76,000. That’s a pretty strong AUV when you play that out for an April average weekly sales.

Jake Bartlett

Got it. And so I guess, I was trying to understand whether April is typically below March, just so we can kind of really understand the improvement that’s going up. So if you could maybe share whether April is typically below March in years past?

Randy Garutti

Generally, it’s not below March. Generally, it’s up. I don’t have the number in front of. We haven’t broken it out in years past as to how — what that difference has been, but generally better month. Also, Jake, it depends on holidays to and when vacations in Eastern and all that get in the way. So better to look at it quarter-over-quarter, I think as we look at those AWS numbers.

Katie Fogertey

And just one thing, it’s kind of obvious, but if you look at pre-COVID, this company looks completely different than it did prior to COVID our exposures, our regions, our footprint is very different. So it is really hard to kind of get a true read on what a normal seasonality would look like.

Jake Bartlett

Got it. Great. And then one question, I think there’s been a investors are really trying to kind of weigh why Shake Shack’s recovery hasn’t been as strong as some of the peers, right, versus pre-COVID? And you have a big unlock with digital and really taking away a bottleneck at the ordering and pay and pick up, which seems to be a powerful driver.

So I know I think the big answer there is that the type of markets you’re in on the type of just urban and also the type of suburban markets you have. But are there any stores or types of urban stores where you’re seeing the same sort of lit versus 2019 that we see at some of your fast casual peers and where you’re kind of seeing …

Randy Garutti

Yes, sure.

Katie Fogertey

Yes.

Jake Bartlett

…the benefit of that online?

Randy Garutti

Yes, absolutely. And we’re not breaking them out, but the — it really depends on them. There are some of your — it’s a similar story as we’ve told this whole time. Your most impacted urban environments are those that are kind of your Midtown office event tourism related.

We have some restaurants that are — or some of our highest volume ever Shacks, not just in New York but in other urban areas that rely on those kind of traffic trends that are still not back to where they were in 2019, whereas there may be some other urban environments where we’re well up on 2019.

And again, we’re not talking about 2019 anymore. We’ve moved on. We’re going to talk about 2021 now when we look at comparisons. But again, I’ve used the language for a while here, and I still feel this way, when I look at every Shack every day, where we’re up it makes sense where we’re down, it makes sense.

And we still, when you — if you’re going to compare us to peers, any peer you’re going to compare us to has multiples of thousands more restaurants than ours across a much wider geographic dispersion than we have. And that’s just a part of our story today with just over 200 Shacks in this country that we’re talking about right now needing to be balanced out with roughly half of those still being urban environments. So we still got some recovery to go, but the trajectory is definitely in the right direction.

Jake Bartlett

Great. I appreciate it. And then one quick one on beef. And my understanding is that your hamburgers are really ground up stakes, right? So you use whole-muscle, you don’t use the trimmings that fast food uses. When I look at the whole-muscle state cuts, I think most of them, if not all, I see being down year-over-year currently. So the question is how you price. So my understanding is that your pricing against a commodity index that you get on a regular basis. But just understand — help us understand as we look at the commodity markets, what should — I know I don’t — I know you’re not going to give the specific blend I would never ask for that. But if I look for most of the costs, they’re down year, but you’ve guided to low single-digit growth for beef in the second quarter. Just trying to reconcile that.

Randy Garutti

Well, I can’t tell you which cuts they are, Jake, as you know. So we can’t officially answer that. Other than to say, look, there were moments last year where beef was really high. There’s been moments this year where it’s been high and a little bit lower. We’ve shared our outlook for the year at kind of the low single digits. And the answer is going to be it depends. Of course, we’re going to generally trend with what the market is doing. But it’s going to depend on those specific cuts that we have and the specific market conditions. I mean, there are so many variables playing into beef with cost of moving things around, cost of corn, feed, international markets and what that might do, that we’re doing our best to give as much of a guide as we can here, but we’re telling everyone very clearly, we’re not exactly sure either, and we do ride at market price.

So — and we’re not going to sacrifice the quality of what we put in our food. So we’re going to continue to buy great meat and price accordingly. So we’ve got about 7% price going in through the system right now. We’ll keep looking at that. If we feel that things are headed even higher and they may be, then we’ll look at price sooner rather than later as well or we may look at it at the end of the year as we normally do, but we haven’t chosen — we haven’t decided on that yet, and we’re looking at it closely every day.

Jake Bartlett

Great. Thank you very much. I appreciate it.

Operator

Our next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

Brian Mullan

Hey, thanks. Just wondering if you could be willing to offer any thoughts on any technology or automation efforts that are being worked on at the industry level? Are there any functions in the kitchen that at least in theory could be automated at a Shake Shack? Any pilots you’re considering or products or tools you’re evaluating just basically asking if anything could actually be viable in the next few years?

Katie Fogertey

Hi, Brian. Thanks for your question. So where we have focused a lot of our technology investments in automation and streamlining process has actually been on the payment side. And you see us talk about kiosk a lot. That’s a great example of something where we started to leverage technology to help make our team members’ jobs easier and help them be more efficient in the restaurant. We’re never saying never, but we’re not currently testing any kind of robotic equipment right now in our kitchen.

Brian Mullan

Okay. Thanks. And then just a follow-up on the drive-thrus. If you were forced to choose now, do you think you’d be opening more than 10 drive-thrus in 2023 or less, I guess, when would that decision need to be made from a planning perspective? Just any early thoughts on the development pipeline for drive-thrus beyond this year would be helpful?

Randy Garutti

Yes. It’s a fair question. I mean, we’re bullish on drive-thru. We’ve not announced the number yet. And they — they definitely had a longer build time than other formats, right? Drive-thrus generally take longer to get entitled, permitted and built. So it’s a longer time line.

We’re not waiting to see on the first 10 what happens. We’re obviously going to commit to more. The question will be how quickly, and we’ll keep you posted on that as we go. I think the focus right now is building a potential pipeline that goes across our formats, which will include in this next few years, we absolutely believe it will include some drivers. And we’re excited about that and want to build more.

Brian Mullan

Thank you.

Operator

Thank you. Our next question comes from Lauren Silverman with Credit Suisse. Please go ahead.

Lauren Silverman

Thanks for the question. So just a lot going on in the consumer environment. Can you talk about how you see Shake Shack positioning in a more challenging environment? We don’t have a history in 2008-2009. So any high-level thoughts would be helpful.

Randy Garutti

Yes, it’s something we talk about a lot, Lauren. I think it will be — nobody knows exactly where the consumer spending environment is going to go. If we expect it to be pressured as it seems to be right now, I think the answer is how does Shake Shack provide — perform in that environment, right? That’s the question.

We have never been through truly a recession. We opened — we started to grow this company in 2008-2009, that’s when the company’s initial growth really took off. And as we’ve always thought about ourselves, we really straddle that fine line of a really exciting trade up from traditional fast food for not that much more money, even though it costs more to serve our premium ingredients and also an available trade down in the event where you may not want to spend as much money.

So hard to say, but we’ve always felt good about that positioning in any economy, and we’re hopeful that, that positioning today will benefit us. But again, hard to say, not going to make a claim on who we’re going to be in an unknown consumer spending environment. But it gives us a lot of confidence to know that we can straddle both ends of that consumer spectrum.

Lauren Silverman

Great. Thank you for that. And I’m going to try one on restaurant margins. Obviously, a lot of noise. Is there any way you can contextualize where margins are running for restaurants that are fully regained sales versus those in urban markets? Just trying to understand the magnitude of what some of the outliers are weighing on the system.

Katie Fogertey

Yes. So we saw a tremendous flow-through on the added sales that we had in March and into April, and it was north of 50%. And what we saw in our urban restaurants, in particular, our restaurants that have been the hardest hit by COVID, that flow-through was particularly strong. And so I think that kind of gives you a little bit of order of magnitude of where there’s potential for margin recovery on that side.

Lauren Silverman

Thank you very much.

Katie Fogertey

Yes.

Operator

Our next question comes from Drew North with Robert W. Baird. Please go ahead.

Drew North

Great. Thanks for taking the question. I wanted to ask about the revised unit opening guidance. On the company operated side, it looks like the range came down five units or so. Just due to some slippage into 2023. I guess, could you provide more color on what you’re seeing out there? And while recognizing you won’t provide specific guidance for 2023, I think it still might be helpful to hear some high-level perspective and how you’re thinking about the development pipeline in the context of those delays and challenges? Thanks.

Randy Garutti

Yes. For sure. Yes, thanks for noting that. I think, look, we’ve got a few units that we had hoped — as we had been sharing that we’re going to have a really busy late fourth quarter. We — that’s still going to be true. But – -there’s a handful of those that likely end up in 2023 now. And we’re okay with that. They’re great restaurants. They’re going to open. They didn’t disappear. They’re just taking longer to get open.

And again, we’ve got a really strong pipeline for 2023. We’re not going to name numbers today, and we’re still working through. There’s so much uncertainty in the market of all the things that I talked about. What’s happening out there is this permitting, construction time lines, availability of construction labor and costs are all more challenging than they’ve ever been, certainly since I’ve been leading this company.

And that just takes time. Things are taking longer. Shacks that might have taken 12 months in the past is taking longer now. And that just time lines are extended all out of our control. Sometimes our landlords don’t even get us the building in the time that they’re supposed to, right, which allows us to then take over our construction and get open. So it’s hard. Those things, I don’t expect to get any easier certainly this year. So we’ll see — we expect to have a strong class for 2023, but we’re not going to get into specifics of that just yet today.

Drew North

Understood. Thanks for the perspective.

Operator

Our next question comes from Andrew Charles with Cowen. Please go ahead.

Andrew Charles

Great. Thanks, guys. We’ve seen in the last few months a lot of restaurant concepts raised their ultimate store potential. And I recognize with you guys, the 450 plus that you’ve outlined, it leaves it a bit open ended around how high you could go. And so I’m wondering your early days with drive-thru, but obviously, it’s been pretty exciting to see the number that you have opened there. What do you guys need to see before you potentially raise this long-term range, recognizing that there’s obviously a new format out there for you guys to capture a lot of share, especially just a high volume.

Randy Garutti

Yes. That format, drive-thru plus it’s the other formats, Andrew. We really think about — there’s a lot of those that we’re targeting it. I was just at when we were in Orlando last week, it was a perfect market example of — we kind of have a couple of tourist shacks. You got a have a couple of traditional mall Shacks. We’ve got a food court. That’s a really strong restaurant for us, and we’ve got to drive through. And then we have kind of a neighborhood core type of shack, right? So you’ve got everything in one market in the six Shacks. That’s a perfect way that we’re looking at our growth. So what do we need to see? We just — we want to see continued strong returns.

We’ve obviously overdelivered on everything we’ve promised there over the years. We’re being impacted a little bit more now on the higher cost to build and lower margins at the moment, but we expect that we’re going to continue to have really strong returns for the very long term. It’s a number that requires a lot of conversations market by market, both art and science, a lot of deep data diving, a lot of learning, a lot of getting past the craziness of COVID, sales over this last two years and get into kind of more regular run rate and understanding what each of those formats can deliver. I expect we’ll be doing quite a bit of growth in all of those formats ahead. And we’ll keep you posted if that number changes. But our goals of these format evolution, has consistently been shared that our goals are to increase that total addressable market with these new formats.

Andrew Charles

Very good. That’s super helpful. And then Kate, a question for you. Just obviously, we’re pleased to see better-than-expected margins in the quarter. And obviously, you guys get your mojo back with our recovery and expand throughout the country that should help with your scale as well. Do you guys have visibility for the return to kind of the long-term 18%, 22% margins? Or is that still kind of TV date?

Katie Fogertey

Yes. I mean as we’ve guided to for next quarter, we’re guiding to 16% to 18% and subtract level operating profit margins. So that kind of gives you a sense of where we think we can build back to even still not being fully recovered. There’s a lot of unknowns out there that we’ve talked about inflationary pressures and how that will all play out. But we feel really good about how the business is recovering and where we stand today.

Andrew Charles

Very good. Thanks guys.

Operator

Thank you. Our next question comes from Jared Hludzinski with JPMorgan.

Jared Hludzinski

Hi. This is Jared on for John Ivankoe. Thanks for the question. Can you discuss the tipping for Shack employees that’s being tested for the in-store pay to cashier transaction as well as for the digital transactions on the Shack app, how customers…

And are these…

Randy Garutti

Absolutely. Yes, you bet.

Jared Hludzinski

You guys cut the needle mover from Pay —

Randy Garutti

Well, we’ll see. It’s super early, right? It’s a test. It’s definitely something that we’ve committed to testing and learning and listening to our teams. One of the things that has consistently had been shared since the beginning of Shake Shack opening is certain guests who have asked for the opportunity to tip and we’ve never accepted those tips.

So we’re happily testing that to give our team members that opportunity to make a little more money. And again, early days not sharing any data yet other than it’s only available today at your in-person cashier transaction where you pay with a credit card. We will be — and we are now testing it in a small number of Shacks within our web channels and Android. Over time, through this year, we’ll begin to test that and roll that out in more of our digital channels, first in our app later in kiosks, hopefully, we’ll see.

But I think whenever we can create an opportunity for our team to make more money, we want to do so. And it’s totally voluntary. We don’t put people in a position where they feel like they have to tip or any of that. And if you choose to, it’s great, and thank you for taking care of our team and a little bit of an extra way. But it’s something that we hope the goal, obviously, is more money for our team and increased retention, better pay overall.

Jared Hludzinski

Thank you.

Operator

Thank you. There are no further questions at this time. I’ll turn the floor back to management for closing remarks.

Randy Garutti

Thanks, everybody. We’ll appreciate all your time today, dig deep in the new reports, and we look forward to taking some time with you soon. Cheers.

Operator

Thank you. That concludes today’s conference. All parties may disconnect. Have a good evening.

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